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The term 'spark spread' is thought to have originated from a trading team at the former National Power Ltd in the UK. It was used to describe the theoretical gross margin of selling a unit of electricity at a higher price than the unit of gas used to produce the power.
One of the key methods to assess the cost benefit of Combined Heat and Power (CHP) in comparison to grid-supplied power and heat is through the spark spread.
In terms of gas engine electricity generation, such as CHP (also known as cogeneration), the spark spread represents the difference between the retail price of electricity and the wholesale cost of natural gas used to generate that energy. It is a good indicator of the economic viability of the project and the likely rate of return on investment.
When calculating the economic viability of CHP/cogeneration projects, a 'spark spread' of 3 usually indicates that the project will be financially viable. However, there are many other factors to consider when assessing the commercial returns of projects. For example, correct CHP gas engine sizing is critical to optimising system performance and improving efficiency.
The UK government’s most recent gas and electricity prices in the non-domestic sector statistics reveals that the spark spread in 2022 Q1 is currently 4.4. That makes each unit of power generated by a gas engine 4.4 times cheaper than purchasing it at the retail price from the energy network.
Commercial fuel cost comparison (pence/kWh) in UK
In Ireland, the spark spread is currently 3.5 based on the average commercial fuel cost comparison 2021 Q4 energy statistics data published by the Sustainable Energy Authority of Ireland (SEAI). On average, that makes each unit of power generated by a gas engine 3.5 times cheaper than purchasing it at the retail price from the energy network.
Average Commercial fuel cost comparison (Euro cent/kWh) in Ireland
The attractive CHP spark spread and other cost saving benefits, such as Climate Change Levy (CCL) exemption contribute to exceptional project returns. For example, many organisations are benefiting from a return on investment within 2-5 years on an asset that has a 15-year lifespan.